Chapter 4 Outline
A. Cartel Formation
1. Three variables are important in determining the success of forming and maintaining a cartel.
a. The cartel must reach an agreement that all producers will abide by.
1. This agreement stipulates the total output to be produced by the cartel and the division of production among the members.
b. The canel must continue to cooperate and come to new agreements as conditions change.
c. The agreement must be enforced.
1. Because it is very profitable for canel members to cheat on the original agreement, there must be some method of enforcement.
B. The Determinants of Cartel Success
1. The fewer the number of firms and the more similar they are, the easier it is to form and operate a cartel.
a. As the number of firms increases, it becomes more difficult to include all the firms in the industry.
b. As the number of firms increases, it becomes more difficult to detect cheating on the agreement.
2. If firms are not similar, it becomes more difficult to determine the division of output and profits.
C. Problems of the OPEC Cartel
1. There are three factors accounting for the serious problems encountered by the OPEC canel.
a. There is a large number of members, as well as several nonmember petroleum producers.
1. The existence of large profits attracted entry to the industry and drove the price of petroleum down.
b. The members are dissnnilar in that they have different and conflicting goals.
1. Countries with small reserves want higher prices now, while countries with large reserves are more concerned with long-run profits.
c. The demand for petroleum is more elastic in the long run.
1. Over time consumers have made adjustments to the higher OPEC price.
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